As Washington works to regulate these products, we must ensure its new rule considers the reality of consumers’ credit needs. So far, the Consumer Financial Protection Bureau has proven conclusion rich and research poor, failing to perform the necessary rigorous academic research to determine how short-term credit, including payday loans, affect borrowers’ financial welfare. To date, all analyses done by the CFPB assume that payday loan usage is harmful.
This is wrong.
In its effort to regulate short-term credit products, the CFPB is picking winners and losers in the marketplace. The CFPB’s proposed rule will limit competition, close businesses, put employees in unemployment lines and reduce options for consumers with short-term credit needs.
Consumers will lose an effective, popular option for managing financial challenges. In the 35 states with payday lending, consumers will be forced to turn to more expensive alternatives or have no options for credit in case of an emergency.
The CFPB's proposed rule sets requirements that no small operator can meet, threatening to destroy small businesses, cost jobs and hurt communities.
Consumers in need of credit will be forced to turn to higher cost options like bank overdrafts without the option of payday loans. These fees make huge sums of money for banks and payday loans provide competitive pressure to keep fees lower.
Illegal, unlicensed and unregulated lenders operate in the shadows, and will inevitably prosper wherever regulated payday lending is restricted or banned. Consumers in need of credit will be at a higher risk of fraud and identity theft.
States have developed laws and regulations to balance consumer protection and equitable access to credit. Under the CFPB's proposed rule, existing, effective state payday lending laws are preempted and they lose the ability to protect their residents.
Consumers in need of credit will be forced to turn to higher cost options like credit cards without the option of payday loans. Credit cards make huge sums of money for banks and payday loans provide competitive pressure to keep fees lower.
“The USHCC is concerned that the CFPB is moving forward with regulations for the small-dollar lending industry, without fully taking into account how such regulations would impact minority businesses, as well as their many neighborhood customers who desire to have more, not fewer, credit options.”
Javier Palomarez, President and CEO, United States Hispanic Chamber of Commerce, May 29, 2014
“[W]hen the Bureau has used a closed-door process to issue guidance and has not broadly gathered input from stakeholders, quality has suffered.” Read more
Bipartisan Policy Center, September 2013
“Over the last several years, the Bureau’s actions and record have proven it can’t function in a sustainable manner. Perhaps, more than any other Washington agency, the CFPB has demonstrated a lack of transparency and a lack of accountability.” Read more
Rep. Randy Neugebauer (R-TX), March 4, 2015
“To the extent that the bureau’s regulatory crackdown constrains nonbank services, tens of millions of consumers would be hit with fewer choices and higher costs or be drawn to offshore lenders who operate beyond U.S. jurisdiction. Those without alternatives could face late fees, service suspensions, foreclosure, or repossession.” Read more
Diane Katz, Research Fellow in Regulatory Policy, Heritage Foundation, January 30, 2012
“Protecting consumers is important to everyone. However, this is an agency that is led by one man. It’s an agency that makes rules and regulations that restrict access to credit for everyone while they collect data on consumers without their permission, and Congress can do nothing about it.” Read more
Rep. Sean Duffy (R-WI), March 5, 2015
“The CFPB’s proposed rules would further constrict Americans’ already-limited credit options. Consumers fare well with choice. Without it, they are imperiled.” Read more
Dennis Shaul, CEO, Community Financial Services Association, January 20, 2015
“The CFPB has an enormous amount of influence impacting all sectors of our economy and every consumer nationwide. Decisions governing such a powerful agency should reflect input from all sides, rather than placing broad regulatory authority in the hands of a single unelected official with little oversight from Congress.” Read more
Sen. Deb Fischer (R-NE), April 9, 2014
“When Dodd-Frank was being debated in Congress, critics warned that the CFPB would have little accountability and would therefore be inclined to overreach. On this issue, the agency seems determined to prove that fear right.” Read more
Ramesh Ponnuru, Visiting Fellow, American Enterprise Institute, February 15, 2015
“The CFPB should not put forward tailored rules because one size does not fit all.” Read more
Rep. Kyrsten Sinema (D-AZ), April 27, 2015
Overly aggressive state regulations that restrict the number of loans or place a cost-prohibitive rate cap produce negative unintended consequences for consumers that vastly exceed any social benefits gained from regulation.
The Urban League and the Hispanic Institute issued studies detailing the need for short-term credit and the adverse consequences on minorities after it is eliminated.
Borrowers who engage in protracted refinancing (or “rollovers”) have better financial outcomes (measured by changes in credit score) than consumers whose borrowing is limited to shorter periods, according to one study.
In a recent survey, 74 percent of payday loan borrowers said they did not have another source of credit available to them when faced with a financial emergency.
U.S. households rely on alternative financial services outside the banking system each year
of consumer complaints received by the CFPB over the past 3 years are related to payday loans
of borrowers agree they were able to repay their loan in the amount of time they had expected
Millions of Americans live paycheck to paycheck. In fact, a recent Federal Reserve study looking at the financial well-being of American households found that 47% of respondents either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money. For these households, financial services like payday, installment or title loans are many times the best option they have to make ends meet.